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*ECOBABBLE WAS IN FULL BLOOM LAST WEEK* as the Federal Reserve's open mouth committee earnestly spread the message, in big city and rural hamlet alike: There's no credit crisis. So why, we wondered, is gold bolting above $700 an ounce? And why, as Joan McCullough of East Shore Partners put it in her Friday dispatch, did "the central banks of the world pump their brains out yesterday," including the beloved Fed, to the tune of $31.25 billion?
It's a question as old as philosophy: Is there a crisis if no one sees it? The answer is a most unphilosophic -- you bet! And a credit crisis is what we've got. As it happens, it's just the nation's monetary managers who are blind to it; any number of folks see it quite clearly, including, oddly, a bunch of solons in Washington. The problem then becomes a wholly different animal: What are they planning to do about it?
The wrong thing, of course.
As we suggested last week, there is a rush to clamber on board the bailout bandwagon. The thinking is exquisitely Washingtonian: The credit crisis, upward spiraling delinquencies and foreclosures in tow, was caused by a surfeit of bad loans. So it obviously follows that the proposed solution is a flood of worse loans.
Apart from its sheer inanity, the notion that people who are in serious trouble because of outright improvidence or suddenly reduced circumstances or simple bad luck -- but, in any case, because they can't meet their mortgage obligations -- will somehow be hunky-dory if payments were only slightly less onerous, faces a few other impediments.
Most of these "rescue" schemes put the onus for making the adjustments to the mortgages on the lenders; presumably somewhere behind the curtain will lurk the government as a kind of co-signer. It sounds to us like a perfect prescription to scare the lenders silly and choke off a recovery in the mortgage market for a decade or so. There's also another little problem. As the always astute Stephanie Pomboy of MacroMavens asks rhetorically, "How do you get a lender to renegotiate a mortgage when you don't know who the lender is?"
With some $6 trillion of the $8 trillion in residential mortgage debt "having been securitized and now sitting...lord only knows where...how, pray tell," she muses, "does one structure a new deal? One can only imagine the long-distance bill the FHA will have to run up as it tries to arrange a conference call with the Taiwanese insurance companies, German banks, U.S. pension funds etc. etc."
Ultimately, she fears, the policy makers, thwarted by securitization, will switch their focus to borrowers. "Why waste precious time trying to identify and then cajole lenders," she reasons, "to play nice with their customers, when you can just run off a fresh batch of dollar bills and dispense them to ailing low-end consumers so they pay their mortgage and credit card bills?"
But, Stephanie sighs, the current credit bust is not confined to real-estate lending. In truth, there are interest rate "resets" galore across the entire economy. Borrowing short has become a raging epidemic. Floating-rate paper now accounts for 54% of total debt issuance, up from 26% as recently as 2002. That means a startling $540 billion in corporate bonds will need to be rolled over next year.
The serial abusers in this realm are -- who else? -- financial enterprises, who need to replace a tidy $428 billion in debt next year, a third more than this year. In 2008, too, some $160 billion worth of leverage loans mature.
To top off this orgy of borrowing short, there's the $87 trillion interest-rate swaps market. Essentially, she explains, here's where long-term fixed-rate obligations are converted into floating-rate short-term notes. Swaps, Stephanie reports, accounted for more than half the growth in the $145 trillion derivatives market in the past two years.
What she foresees is a kind of financial Armageddon as the credit crunch deepens and widens. "Scarcely will they finish putting the subprime situation under house arrest" before policymakers will be forced to address similar problems in "credit-card debt, commercial-real-estate loans, CLOs...and beyond."
As the credit engine sputters, the repair crew will be forced to "print and spend." That, she says, is what gold has figured out. And what equities, we might add, are only beginning to learn.
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